The Market Today
China’s Coronavirus Hits U.S., Roils Investors, Overshadows Senate Impeachment Proceedings
by Craig Dismuke, Dudley Carter
Mortgage Applications, Home Prices, and Existing Home Sales Headline Housing-Heavy Calendar: Mortgage applications for the week ending January 17 pulled back 1.2% on a 1.8% decline in refis and a 2.0% drop in purchases. The pullback came after two weeks of very solid gains. The four-week averages rose for both series: purchase apps are now at their highest average since 2009 while the refi average is 67% above its average level of activity from 2017 to 2018. Some volatility is to be expected for a period in all of the housing data given the unusually warm December exacerbating the already-above-trend pace of activity.
Two more reports on the housing market are scheduled today. The FHFA home price index for November is scheduled for 8:00 a.m. More importantly, December’s existing home sales data are scheduled for 9:00 a.m. Sales are expected to gain 1.5% MoM which would bring the 2019 tally to +8.6%, the best annual pace since 2012 and a strong turnaround from a 10.2% decline in 2018.
Chicago Fed National Activity Index Shows Broad Weakness: The Chicago Fed National Activity Index unexpectedly plunged from +0.41 to -0.35. The CFNAI is an aggregation of 85 different economic indicators including reports on 1) production and income, 2) the labor market, 3) personal consumption and housing, and 4) sales and inventories. December’s decline came on weakness from each main category with the exception of personal consumption and housing. For context, when the CFNAI’s three-month average is above +0.70 following an expansion (or a one-month reading above 1.00), a period of more rapid inflation is expected to occur. The 3-month average for the CFNAI is now down to -0.23 and has been negative for eleven consecutive months.
China Virus Overshadows Start of Impeachment Trial: President Trump’s impeachment trial began in the Senate Tuesday with both sides debating the proposed rules under which the process will be carried out. However, it was worry around a deadly and contagious coronavirus in China that was behind the daily risk-off trend in global markets. Asia stocks fell more than 1% before U.S. trading on concerns that the outbreak could become an economic story similar to that of the SARS virus in the early 2000s that weighed on Asian activity. The timing of the sickness compounded those concerns, showing up shortly before China’s Lunar New Year holiday, a period typically associated with heavy travel.
Lower Yields a Symptom of the Sickness Scare: While the global weakness had already pulled the Treasury curve down, yields retested those early lows shortly after lunch on a headline that the U.S. Center for Disease Control and Prevention had confirmed a first case of the coronavirus within the U.S. The infected individual lives in Washington state and was reported to have recently returned from a visit to China. U.S. equities, which had fully recovered from an opening drop at one point, also fell back on the news and ultimately finished lower on the day. The S&P 500 dropped 0.3% by the close while the Dow, due to an outsized impact of slumping Boeing shares, fell 0.5%. The 2-year Treasury yield finished down 2.9 bps at 1.53% while the 10-year yield dropped 4.7 bps to 1.77%, a new low for the year that stretches back to early December.
Stocks Recover as China Tries to Contain the Sickness: Markets appear to be feeling somewhat better on Wednesday, partially recovering from prior day declines that resulted from reports that the contagious coronavirus had already spread from China to several other countries. After falling again at the open, stocks in Asia reversed higher and closed up 0.6%. Over the last twenty-four hours, Chinese officials have publicly described their ongoing epidemiological progress and the plans and procedures aimed at containing the virus. Stocks in Europe were also on the mend, up 0.2% around 7 a.m. CT, and U.S. futures had fully unwounded Tuesday’s weakness and were at a new record.
Yields Point in Different Directions Amid Equity Recovery: Global bond yields, however, have remained subdued, inching lower across most of Europe. Sovereign curves in the U.K. and Italy were the two exceptions in the region, the former helped higher by surging business optimism in a top survey while the latter fell victim to more political uncertainty on the resignation of Di Maio as head of the Five Star Movement, part of the current governing coalition. Before this morning’s regional Fed survey, Treasury yields were higher by 1 bp on average. Just after that survey’s release at 7:30 a.m. CT, yields were back closer to unchanged.